In re Hurd, Bankruptcy No. NK 79-01935.

• Decision Date: 05 June 1980
• Docket Number: Bankruptcy No. NK 79-01935.
• Parties: In re Lee Allen HURD and Mary Louise Hurd, Debtors.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan

4 B.R. 551 (1980)

In re Lee Allen HURD and Mary Louise Hurd, Debtors.

Bankruptcy No. NK 79-01935.

United States Bankruptcy Court, W.D. Michigan.

June 5, 1980.

Bankruptcy Law Clinic, P.C., Murray B. DeGroot, Grand Rapids, Mich., for debtors.

Deming, Hughey, Keiser & Allen, Roger G. Allen, Kalamazoo, Mich., objecting creditor.

Walsh & Miller, P.C., Richard C. Walsh, Kalamazoo, Mich., for American National Bank and Trust Co., an objecting creditor.

DAVID E. NIMS, Jr., Bankruptcy Judge.

On October 16, 1979, Lee Allen Hurd and Mary Louise Hurd filed a joint voluntary petition under Chapter 13 of Title 11 of the Bankruptcy Code. Two creditors have filed objections to confirmation.

The plan calls for payments to the trustee of $330 per month. Distributions would be as follows:

First—Attorney\'s fees to the debtor of $800 and filing fees would be paid until paid in full (approximately 3 months).

Second—Payments would be made to secured creditors at a set amount each month up to the value of their collateral —

Three would be paid a total of $400 at $20 per month for approximately 20 months.

American National Bank & Trust Co., one of the objecting creditors, would be paid $7,000 at the rate of $260 per month for approximately 27 months.

Third—Unsecured creditors (totaling approximately $23,000) would be paid 5% of their debt or about $1,150. Payments would amount to $17 per month after three months. After 23 months, the amounts would increase to $37 per month and after 30 months the monthly payments would increase to $297 per month.

The court is satisfied that the debtors payments of $330 per month are the best they can do at present.

Their payments to secured creditors are to save a 1979 Ford V-8 Pickup F-100 Custom purchased new on May 17, 1979, a 1976 V-8 Ford Gran Torino Wagon, furniture, appliances and a T.V.

The court is also of the opinion that under a Chapter 7 case, debtors would have no assets available to unsecured creditors.

Lee Hurd filed a voluntary petition in straight bankruptcy in 1975 and received a discharge. It is not disputed that he would be denied a discharge in a Chapter 7 case. 11 U.S.C. Sec. 727(a)(8). Debtors also filed joint voluntary petitions under Chapter XIII on August 17, 1979, whereby their plan proposed to pay $550 per month up to June, 1981, at which time payments would be increased to $1,200. All creditors were to be paid 100% under this plan. Neither debtor appeared at the first meeting of creditors as ordered, so the meeting was adjourned. Two days before the adjourned first meeting a petition was filed to dismiss the Chapter XIII case, and, two days later, this Chapter 13 case was commenced.

The objections and briefs raised three issues of law:

1. Does the previous discharge bar confirmation?

2. Does the fact that one debtor would be denied a discharge in a Chapter 7 case bar confirmation under Section 1325(a)(4)?

3. Is the plan filed in good faith?

1. Does the previous discharge bar confirmation?

11 U.S.C. Section 103(b) states, "Subchapters I and II of Chapter 7 of this title apply only in a case under such chapter." 11 U.S.C. Section 727(a)(9) is part of Subchapter II, and should not apply to a Chapter 13 case under 11 U.S.C. Section 1325(a)(1).

Basically the creditor is arguing that failure to read the six-year bar of Section 727(a)(9) into Chapter 13 will lead to "absurd results."

11 U.S.C. Section 727(a)(9) is not specifically applicable to a Chapter 13 confirmation. Whether or not the filing of the plan to take advantage of this fact raises doubts about the debtor's "good faith" is a separate issue.

2. Does the fact that one debtor would be denied a discharge in a Chapter 7 case bar confirmation under Section 1325(a)(4)?

11 U.S.C. Section 1325(a)(4) reads:

"(a) The court shall confirm a plan if . . .

(4) The value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7 of this title on such date." (underlining added)

The objecting creditor argues that since the debtors cannot get a Chapter 7 discharge, the unsecured creditors would have the right to pursue their claims against the debtors in the future; therefore, this right is part of "the amount that would be paid" in a liquidation contemplated by 11 U.S.C. Section 1325(a)(4).

Accepting this construction of Section 1325(a)(4) would lead to serious problems. This provision would then be in conflict with Section 1328(a), which allows discharge under Chapter 13 of debts which would be nondischargeable under Chapter 7. An unsecured creditor would argue that a nondischargeable unsecured claim exists, and that such claim would be paid under a Chapter 7 liquidation. Section 1328(a) would then be meaningless. It would also be impractical for the court to place a value on a creditor's right of action against a debtor not discharged; factors such as the speed with which judgment could be obtained, and collectability of the judgment, would have to be considered. Yet, how could the Court fairly and accurately consider these factors?

The Statute itself answers the issue. The key words are "the amount that would be paid . . . on such date . . ." i.e. the effective date of the plan. The effective date of the plan will usually be the date of confirmation. As Collier puts it:

"The language of the Statute plainly means that the Court is to ascribe a liquidation value to all non-exempt property of the estate, as that term is defined under Section 541, at or about the time of the confirmation hearing, less all allowable Chapter 7 administrative expenses. The liquidation value must be further reduced by the amount of all lien claims enforceable against the property under Chapter 7 and by the amount apportionable to the holders of allowed unsecured claims entitled to priority of distribution over the particular allowed unsecured claim holder whose best interests are being measured." 5 Collier on Bankruptcy (15th Ed.) ¶ 1325.012Dbiv at p. 1325-11, 12.

11 U.S.C. Section 541(a)(1) says the estate is comprised of ". . . all legal or equitable interests of the debtor in property as of the commencement of the case." Except as provided for in the rest of Section 541(a), most assets coming into the debtor's hands will not be part of this estate, and are not part of the liquidation value, though they might be subject to a creditor's claims in the future. Whether or not a discharge would be granted under Chapter 7 is essentially irrelevant; in either case Section 1325(a)(4) speaks only to recovery from assets of the debtor's estate.

The creditors also have claimed that this plan is not "in the best interest of creditors."

There is no mention of the "best interests of creditors" in Section 1325(a)(4). The objecting creditor relies solely on some references to such a "test" in the Legislative History; specifically to Senate Report No. 95-989, 95th Cong., 2d Sess. (1978) at 142, U.S.Code Cong. & Admin. News 1978, p. 5787. But the phrase is really used as a shorthand for what is actually contained in Section 1325(a)(4). See House Report No. 95-595, 95th Cong., 1st Sess. (1977) at p. 430, U.S.Code Cong. & Admin. News 1978, p. 5963 (note the use of the hyphen); 5 Collier, supra, at p. 1325-10 (Sections describing Section 1325(a)(4) are titled "The Best Interests Test Under Chapter 13. Section 1325(a)(4).").

Thus, I would have to find that under the definition of Section 1325(a)(4), the plan is in the best interest of creditors.

3. Is the plan filed in good faith?

11 U.S.C. Section 1325(a) provides inter alia that "The Court shall confirm a plan if— * * *

"(3) The plan has been proposed in good faith and not by any means forbidden by law * * *."

All of the subsections of Section 1325(a) are joined by the conjunction "and", so the court must find that the plan meets the requirements set forth in each subsection. The Bankruptcy Act of 1898 also required a finding by the court that the Chapter XIII plan and its acceptance were in good faith as a prerequisite to confirmation. Bankruptcy Act Sections 651 and 656. This language was almost identical to that in Chapter XI, Bankruptcy Act Section 366(4).

What is good faith?

In its discussion of Section 656, 10 Collier on Bankruptcy (14th Ed., 1978) states:

"Section 656(a)(4) is confined to the proposal of the plan and its acceptance, but it views the conduct of creditors as well as the debtor. Fraud, improper scheduling, payment or promises to pay money to procure acceptances are instances of lack of good faith as well as acts barred by the statute. Good faith itself is not defined but generally the inquiry is directed to whether or not there has been an abuse of the provisions, purpose, or spirit of Chapter XIII in the proposal or plan."

Thus, we must look to the purpose and spirit of Chapter 13.

The following factors are relevant in determining the purpose and spirit of Chapter 13:

1. The history of American bankruptcy law;

2. The legislative history of the new Bankruptcy Code; and

3. Consideration of the Code as a whole, in order to find a construction of the "good faith" provision which makes sense in light of the other applicable Code provisions.

1. A consideration of the history of bankruptcy in America will make clear the purpose and spirit of the law as determined by the Constitution, Congress and the courts.

In 1797, the Constitutional Convention proposed to grant to Congress the power "to establish * * * uniform Laws on the subject of Bankruptcies throughout the United States." Art. I, Sec. 8 cl. 4, U.S. Constitution. The lawyer members of the Convention were trained under the English laws of the time and thus would take their definition from those laws. The first English statute was an Act solely for the benefit of the creditors and no discharge was provided. 34 & 35 Henry VIII,...